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Carnival Corporation - Ghost Ship Investing?

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10

March 21, 2010 – Comments (14) | RELATED TICKERS: CCL , RCL , DIS

The wind blew with such ferocity the passengers believed any second they would be swept over the side of the mighty ship, followed soon thereafter by the ship itself.

The captain, eyes never leaving the horizon though there was nothing for them to see but God's wrath, told the helmsman to keep a steady hand that all would be well soon enough since the eye of the typhoon had passed them over near an hour before.

The first mate unknowingly began to pray aloud, telling his God he was not yet ready to visit Davy Jones' locker, while the ship's engineer, also unknowingly aloud, began cursing himself for not only allowing a woman into the wheelhouse, but one that whistled and carried a black sea bag.

Without warning the ship began to roll hard to port. The helmsman fought to keep the huge ship upright as the captain screamed for more speed.

But just as the ship's massive brass screws began to increase their revolutions there was a tearing of metal, followed by a muffled explosion deep within the bowels of the huge ship.

In that instant the captain knew his days of roaming the world's seas had come to an end, that another sunrise, he would never see.

With one final shudder, the starboard screw, in full revolution, broke through the waves, and without warning another ship became a permanent guest in the house that Neptune ruled.

Casting Off
On Tuesday, March 23, before the opening bell, Carnival Corporation (NYSE: CCL) will report earnings, expected by First Call to be $0.14 a share, $0.19 a share lower than a year ago.

What gives us pause is that the price of the stock is up almost 15% over the past 5 weeks yet analysts are predicting lowered earnings.

While we may not be square knot experts, we do know the difference between walking up a gangway and walking off a plank.

Basis
Financial information related to the Carnival Corporation, contained in this report, is based on the company's most recent Form 10-K filing for fiscal year ending November 30, 2009, as filed with the Securities and Exchange Commission on January 29, 2010.

What They Do
Carnival Corporation and Carnival and Carnival plc is a global cruise company and one of the largest vacation companies in the world. Their portfolio of cruise brands includes Carnival Cruise Lines, Holland America Line, Princess Cruises and Seabourn Cruise Line in North America; P&O Cruises, Cunard Line and Ocean Village in the United Kingdom; AIDA in Germany; Costa Cruises in southern Europe; Iberocruceros in Spain; and P&O Cruises in Australia.

These brands, which the company claims comprise the most recognized cruise brands in North America, the United Kingdom, Germany, Southern Europe and Spain, offer a wide range of holiday and vacation products to a customer base that is broadly varied in terms of cultures, languages and leisure-time preferences.

The company also owns two tour companies that complement its cruise operations, Holland America and Princess Tours in Alaska and the Canadian Yukon. The company also claims that combined, the company's vacation companies attract eight million guests annually.

Carnival Corporation is incorporated in Panama, and Carnival plc is incorporated in England and Wales and operate as a dual listed company (“DLC”), whereby the businesses of Carnival Corporation and Carnival plc are combined through a number of contracts and through provisions in Carnival Corporation’s Articles of Incorporation and By-Laws and Carnival plc’s Articles of Association.

The two companies operate as if they are a single economic enterprise, with a single executive management team and identical Boards of Directors, but each retains its separate legal identity.

The company competes with Royal Caribbean Cruises, Ltd. (NYSE: RCL), and Disney Cruise Line, a division of The Walt Disney Company (NYSE: DIS).

Short-Term Investment
The time to have taken a short-term position in this stock was back in late Novemeber2009, or in very late December 2009, or in the later part of January 2010.

At the moment, the stock is overbought, and basis the trend line we watch, it has been overbought since almost the middle of February 2010.

The stock closed recently at $37.62 and would require only a 2% gain to reach first resistance of $38.37, while first support would allow the stock price to fall 8% from its recent close.

Considering that the recent price is almost 2% above the stock's 13 day moving average and almost 7.5% above the stock's 50 day moving average, we think taking a short-term position at this time would be fool hardy.

If anything, we would think given the current short-term conditions, the stock makes a better short than short-term investment.

Long-Term (5 Year Hold) Investment
With the possible exception of the company's trailing twelve month PE ratio, of the investment metrics we like to focus on, there was not one that we consider investment quality.

Current liabilities exceed current assets by almost 2:1, debt exceeds EBITDA by almost 3:1, return on invested capital is less than 10%, and the debt to cash ratio is almost 19:1.

While the company does appear to pay a reasonable average interest rate of less 4% on its almost $8 billion dollars of debt, with net operating profit after taxes of less than 24%, and CAPEX consuming almost 6% of that, we wonder just how long it will take to reduce the company's debt to something far more manageable.

In addition, while free cash flow did improve from $0.59 in FY2008 to $1.04 in FY2009, we simply don't believe the improvement is sustainable.

Valuations
The stock has an Enterprise Value (Market Cap less Cash plus debt) of $47, an Equity Value (Market Cap plus Cash less debt) of $28, and a Tangible Book Value of $17.

We think a Reasonable Value Estimate for the stock is in the in the $23 to $26 range, and note that at least to us, free cash flow at 36 times recent pricing makes the stock incredibly expensive.

Final Thoughts
The ship's captain told the helmsman to keep her steady, that he had sight of a large object dead ahead. He further instructed the helmsman to continue to follow the oil slick drifting with the current on the calm sea.

As the captain's ship approached the massive object, the captain shook his head, telling the first officer that what he was seeing was impossible.

Yet there on her side, her starboard screw spinning well above the surface of the sea, was the Fester, lost with all hands and all passengers more than 80 years ago.

Was this a ghost ship worthy of investment in her salvage wondered the captain, or merely an illusion made all the more real by the rumors surrounding her?

Wax

To download the Wax Ink Carnival Corporation Raw Value worksheet, please click here.

14 Comments – Post Your Own

#1) On March 21, 2010 at 8:52 AM, portefeuille (99.65) wrote:

Equity Value (Market Cap plus Cash less debt)

Equity value

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#2) On March 21, 2010 at 9:01 AM, wax (96.73) wrote:

portefeuille;

Thank you for your link, it is much appreciated.

At the end of the day we know the definition your link points to is more correct than ours, it's just that we believe ours is more useful as an investment measure.

Wax

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#3) On March 21, 2010 at 9:15 AM, portefeuille (99.65) wrote:

I thought it was rather a casually made error. If it is not then your definitions

Enterprise Value (Market Cap less Cash plus debt) 

and

Equity Value (Market Cap plus Cash less debt)

give

Equity Value = Enterprise Value plus 2 times (Cash less debt) ...

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#4) On March 21, 2010 at 9:16 AM, portefeuille (99.65) wrote:

it is much appreciated

thanks for the Sunday morning sarcasm, hehe ...

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#5) On March 21, 2010 at 9:57 AM, cashkid79 (94.62) wrote:

All I have to say is that the site clearly says it is likely to give you incorrect information and that you can lose a 'staggering amount of money' i think, so...oh and the other link, blocked by my firewall (weird)...anyhow, I suppose that I should trust you, that site, or what exactly are you saying - the point here I mean is what again???  To trust you and not the Carnival Wax whatever that doesn't solicit as far as I know or have even heard of any advertising or anything to make any profit???

Liprie, TP

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#6) On March 21, 2010 at 5:40 PM, wax (96.73) wrote:

portefeuille;

For a very long time, Fooldom has used Enterprise Value as a measure of the worth of a company, and for an equally long time we have said fooey.

What we are interested in as investors, is the value of a debt free, cash rich company. But that's just us.

Many investors never actually take the time to determine what to them is a reasonable value for a stock, which is why we often times mention Enterprise Value.

Equity Value, as far as we are concerned, is not Shareholder's Equity, for that to us is the measure of a company prior to being liquidated.

Instead, we use Equity Value as way to highlight the value of an ongoing concern that is debt free.

Certainly our little metrics do not work for everyone and that's just fine with us.

The idea behind what we post including our metrics, just like the idea behind the worksheets we make available for folks to download, is not to recommend a stock, it is to create a starting point for interested investors to perform their own research.

Accordingly, the link that you posted, we sincerely do appreciate, since it provided other investors with an avenue for additional thought about their investment objectives.

Wax

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#7) On March 21, 2010 at 5:50 PM, wax (96.73) wrote:

cashkid;

What the site says is:

Because we are individual investors having never worked in the financial services industry, the odds of financial ruin using information obtained from this site are staggering.

Always consult a registered investment professional
before investing any money.

The point of the post, as is the point with all of our posts, is to encourage individual investors to do their own research.

To often, individual investors pay attention to historical prices and never take the time to actually investigate a company before they buy the stock.

I mean we doubt you would buy a used car sight unseen, right?

In the end, we ask not that you trust us, but that you use our information as a starting point for your own research.

Which is exactly how we use our information.

Wax

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#8) On March 21, 2010 at 8:18 PM, portefeuille (99.65) wrote:

#3,6 are you using

Equity Value = Enterprise Value plus 2 times (Cash less debt)? 

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#9) On March 21, 2010 at 8:22 PM, portefeuille (99.65) wrote:

I think you just made an error somewhere in your post.

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#10) On March 21, 2010 at 10:21 PM, batkotji (< 20) wrote:

Portefeuille..just curious are you a desi ? 

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#11) On March 22, 2010 at 5:25 AM, wax (96.73) wrote:

portefeuille;

To us equity value is stock price+cash per share-debt per share.

Also as the post says, the data is from the company's latest annual financial statement. If you are looking at quarterly data, then with a recent close of $37.62, the equity value would be about $28.86.

Wax

 

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#12) On March 22, 2010 at 7:21 AM, shoptrade203 (< 20) wrote:


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#13) On March 22, 2010 at 1:33 PM, cashkid79 (94.62) wrote:

Luck is a word invented by those who needed an excuse to compensate for their own lack of preparation, strategy, and execution.

Liprie, TL

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#14) On March 23, 2010 at 5:52 AM, wax (96.73) wrote:

cashkid;

shoptrade is just spam generation software, not a real person.

Wax

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